Proactive Tax Planning 5 of 6

A charitable remainder trust can serve many purposes in one’s financial plan. Clearly, you have to be charitably inclined, as there is an irrevocable charitable component to this strategy. But in addition to helping out your favorite charity (or charities), you get several big tax advantages from this arrangement.

Income Tax – Your gift provides you with an income tax deduction, able to be spread out for up to five years, for the value of your initial donation. Where things get tricky is determining the amount of the deduction because the value of the gift is not simply the value of the deduction.

Estate Tax – When you pass away, the trust property goes to the charity outright. Hence, it’s no longer in your estate and no longer subject to federal estate tax.

Capital Gains Tax – If you donate highly appreciated assets to the trust, and the trust then sells that property, the proceeds are not taxed as capital gains. This is because charities, unlike individuals, don’t have to pay capital gains tax.

What’s also nice about a charitable remainder trust is the participation you can have in the trusts income, even after giving up legal control of the property. Every year, based on a pre-determined arrangement set upon establishing the trust, you will receive trust income which means, in theory, you will be paid back some of the principal of your gift, over time.

Here’s an example of how a charitable remainder trust works:

Let’s say you bought stock many years ago for $100,000. It’s now worth $500,000 and pays very little in dividends. If you sold the stock you would have to pay capital gains taxes on your $400,000 profit. At a 15% tax rate, your tax bill would be $60,000.

If instead, you set up a charitable remainder trust, you could:

Donate the $500,000 value of the stock to the trust

Name your alma mater as beneficiary of the remainder interest of the trust

For the year in which your contribution is made, you may be able to take a tax deduction for the current value of the charities interest

For example (simple math): If the IRS calculates that you are projected to receive $300,000 in income payments over the life of the trust, then the present value of your $500,000 initial donation is the $200,000 projected to remain at death.

This deduction is subject to certain restrictions on charitable deductions, however, any unused charitable contribution deductions may carry forward for up to five additional tax years

The trustee pays you (or another non-charitable beneficiary such as a family member) a percent of the trust value, for life – not to exceed 20 years

Based on this example, an income payment of 5% would equal $25,000 the first year and payments would continue in subsequent years

Upon your death (or the death of the non-charitable beneficiary) the charity receives the remainder of the trust assets

While the benefits may look enticing, there are some additional factors to consider. First, this type of trust requires expert help to set up. Second, only under certain limited circumstances are you able to change your charitable beneficiaries. So carefully review any and all decisions with your attorney or tax advisor before proceeding with a strategy like this.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific tax or legal issues with a qualified tax or legal professional. Haas Financial Group, US Financial Advisors and LPL Financial do not provide tax and/or legal advice or services.

Securities offered through LPL Financial, Member FINRA and SIPC. Investment advice offered through U.S. Financial Advisors, a registered investment advisor. U.S. Financial Advisors and Haas Financial Group are separate entities from LPL Financial.